Initiative for Policy DialogueThe South Centre

THE AGE OF AUSTERITYTHE AGE OF AUSTERITYAdjustment today, development Adjustment today, development

impacts, and what to do? impacts, and what to do?

Isabel Ortiz EURODAD-GLOPOLIS International Conference

Prague 3-5 June 2013

Phases of the Crisis (2008-2015)

Source: Ortiz and Cummins.2013. The Age of Austerity. IPD and the South Centre - based on IMF’s World Economic Outlook (October 2012)

Number of Countries Contracting Public Expenditures as a % GDP, 2008-16

55

8937

106111

68

119132

122131

91 94 90

Crisis Phase I (2008-09) – Fiscal Stimulus Plans• $2.4 trillion fiscal stimulus plans in 50 countries

Social Protection in Fiscal Stimulus Plans 2008-09

Source: Ortiz and Cummins, A Recovery for All, UNICEF, 2012

Bailing out Banks, not People

Crisis Phase III (2013-15): A quarter of countries excessive contraction (expenditures below pre-crisis levels)

Changes in Total Government Spending as a %GDP, 2013-15 avg. over 2005-07 avg.

How are Countries Adjusting? Austerity Measures in 174 Countries, 2010-13

Source: Ortiz and Cummins. 2013. The Age of Austerity. IPD and the South Centre – based on 314 IMF country reports 2010-2013

100

119

9894

8680

3732

Development Impacts119 countries contracting public expenditures in 2012 (89 developing)

Phasing-out subsidies (food, fuel and others) in 100 countries, despite record-high food prices in many regionsWage bill cuts or caps in 98 countries, reducing the salaries of public-sector workers who provide essential services to the population. VAT increases on basic goods and services that are consumed by the poor – and which may further contract economic activity – in 94 countriesRationalizing and targeting safety nets are under consideration in 80 countries, at a time when governments should be looking to scale up benefits though social protection floorsReforming pension and health care systems in 86 and 37 countries Labor flexibilization reforms in 30 countries, eroding workers rightsSource: Ortiz and Cummins. 2013. The Age of Austerity. IPD and the South Centre – based on 314 IMF country reports 2010-2013

A Crisis of Social Support• Vulnerable households are most impacted by austerity measures,

and are bearing the costs of a “recovery” that has largely excluded them.– They were left behind prior to the crisis – They were severely affected during the crisis– They are now suffering from adjustment measures and from

lack of employment due to reduced growth.

• The deployment of vast public resources to rescue the financial sector forced taxpayers to absorb the losses, caused sovereign debt to increase, and, ultimately, hindered global economic growth. Now the cost of adjustment has been passed on to populations, many who have been coping with fewer jobs, lower income and reduced access to public goods and services for more than five years.

Fiscal Space for an Equitable Recovery Exists Even in the Poorest Countries

There are many options, supported by UN and IFIs policy statements:1.Re-allocating public expenditures2.Increasing tax revenues3.Lobbying for increased aid and transfers4.Fighting illicit financial flows5.Tapping into fiscal and foreign exchange reserves6.Restructuring debt7.Adopting a more accommodative macroeconomic framework (e.g. tolerance to some inflation, fiscal deficit)

Source: Ortiz and Cummins, “Finding Fiscal Space,” in A Recovery for All, UNICEF, 2012

Risks to Socio-Economic Recovery – The Need for a Policy Shift

• United Nations: Austerity is likely to bring the global economy into further recession. Called on governments for concerted policy action to support development goals

• Policy shift started in a few Asian and Latin American countries 2012-13 . Concern on low growth and demand for their exports: – Building internal markets (minimum wage policies,

social protection, subsidies, social services, etc) – New round of fiscal stimulus to be invested in

infrastructure, tax incentives -- the amounts are small for sustained recovery ($0.38 trillion in 2012, compare to $2.4 trillion fiscal stimulus in 2008) but a sign of policy change

Policy shift: Ecuador Like Europe, no national currency (it uses the US$) The government kept interest rates low and expanded

liquidity by requiring banks to keep at least 45% of their reserves in Ecuador

it took a partial default on its illegitimate external debt (private debt that had been made public)

Freed public resources were invested in human development, doubling education and housing spending, plus cash transfer Bono de Desarrollo Humano.

Impressive results: Poverty from 36% to 28%, unemployment From 9.1% to 4.9%, rise school enrollment rates.

Policy shift: Iceland Iceland repudiated private debt to foreign banks and did not

bail-out its financial sector, pushing losses on to bondholders instead of taxpayers.

Temporary capital controls to shield itself from capital outflows

Preserved the social welfare system despite fiscal consolidation. May 2011, rise in nominal wages of 6%

Unemployment rate fell to about 7% in 2012 Progressive income tax, creating fiscal space to preserve

social benefits. When expenditure compression began in 2010, social

protection spending rose as a percent of GDP, the number of households receiving income support increased.

These policies led to a sharp reduction in inequality. Iceland’s gini coefficient—which had risen during the boom years—fell in 2010 to levels consistent with its Nordic peers.

Download:

“The Age of Austerity – A Review of Public Expenditures and Adjustment Measures in 181 Countries.” 2013. New York and Geneva: IPD and South Centrehttp://policydialogue.org/files/publications/Age_of_Austerity_Ortiz_and_Cummins.pdf

“A Recovery for All”. 2012. New York: UNICEF Policy and Practice. http://arecoveryforall.blogspot.com/

Thank You